How Bad Are Things? Corporate Profitability?

Worst recession since the Great Depression? Not really, although it’s not pleasant.

Unemployment is down. Good news? Yes, but not the whole picture.

Corporations profitable? You bet. They have lots of cash on their balance sheets, ready to expand and redeploy at the appropriate time.

These are just a few of the things I talk about in this week’s video. I include some nice graphs too, so be sure to click on the video to hear more!!!

TRANSCRIPT:

Hi there, Mike Brady with Generosity Wealth Management, here in Boulder, Colorado. And today I’m thinking a little bit about corporate profitability. I’m thinking of some statistics as it relates to the recession and some unemployment ex cetera. So let me just get started here.

Warren Buffet is famous for saying, “be fearful when others are greedy and greedy when others are fearful.” And consumer sentiment has been down for quite some time but Warren Buffet, he has been very bullish, he’s been very optimistic on things going forward. And I just want to put things in perspective. Right now the unemployment rate is about 8.6 per cent but I think we probably all know someone who is either unemployed, been unemployed for a long time or is underemployed. And that means someone who would really like a full time job but really is only working either part time or they would like a full time job but they are at the age where they just decide to retire a little bit early. So they leave the labor force. And so the way those numbers work is if you are part-time or you’re discouraged and leave, go back to school, get more education or you retire, you come out of the available work force. And so, I think unemployment is something that really is a problem. It’s probably going to be a problem going forward but I want to provide some context as it relates to recessions and expansions. You’ve probably heard that this is the worst recession, the great recession, the worst since the great depression, and that is true. As a percentage, but I want to put some context on it just as a magnitude.

Hopefully, there’s a chart that’s up on your video there, if it’s not there, that means that my compliance department wouldn’t let me put up any of my charts here, so I’m doing two versions of this video- one with chart overlays and one without. But that being said, if it’s not there, let me talk to you about it.

The Great Depression had a twenty-six, almost twenty seven per cent decline in real GDP. GDP is the gross domestic product, kind of the national income. And most recently, we’ve had a five per cent decline, not twenty-six or twenty-seven, but five. And as a matter of fact, if you add up all the recessions we’ve had since the great depression, they’re about what we had in the Great Depression itself. So just to provide some context, it’s actually relatively small even though the negative five per cent is the biggest one since that huge number in the ‘30s. But the average length of an expansion is forty-four months, and the average length of a recession is fifteen months. And technically we are not in a recession right now. Although it doesn’t feel that way- I know that!

Corporate cash: corporations are holding on to a lot of cash at this point. They had, as all of their kind of short term assets, their current assets, back in 2000, about fourteen per cent of their current assets were held in cash. Today that’s about twenty-eight per cent. As a matter of fact, just since ’08, it’s gone from twenty to twenty-eight per cent. (See chart inlay.) Apple’s got over 70 billion dollars in cash. And so the corporations themselves are getting stronger, it’s that simple. Their after tax, corporate profits are over ten per cent at this point. And so that was negative just a couple of years ago and right before the huge crisis of 2008, 2009, it was not even nine per cent. So this is really at a high for corporate profits, after tax corporate profits. And so we just have to keep that into consideration.

They’ve got this cash, kind of on the sidelines, waiting to redeploy it into research and development and to purchase other companies and expand their businesses when the opportunities are ripe. When they also know that the demand is going to be there for their products. So it’s a kind of a wait-and-see, they don’t want to do it too quick because then people can’t buy their products or services. But they can’t be too late because they want to be there, sort of “just-in-time” when the right ingredients are there.

That’s what I’m thinking about this week. There’s just a few more things I want to talk about that are actually a little off-topic.

The Consumer Price Index, the CPI, is …, a lot of people talk about it being three per cent, 3.2 per cent, for the last fifty years, it’s actually averaged 4.1 per cent. I mean, it’s been hugely high, you know, fifteen, sixteen, seventeen per cent. Right now it’s very low at about two percent on the core. But the average is about 4.1 per cent, which is higher that a lot of people talk about when they are doing their retirement plans.

The end of the year is coming up as well, so the last thing I want to leave you with is: you can do IRA distributions to a charity this year, all the way up to 100,000 dollars. And it’s hopeful that the law will be renewed for next year, 2012, but it’s not guaranteed. So if you have an itching, you know, to do some IRA contributions directly from the IRA right into a charity without it counting as taxable income then give me a call and I can talk to you about that. I really would love to help you out in that regard.

Sorry it’s a little disjointed today but I just had some stuff I really wanted to talk about so I really, really hope you enjoyed the video.

Mike Brady, Generosity Wealth Management; I believe that money can and should do good things for you, your family and the causes you believe in. My phone number is 303.747.6455. I am comprehensive, a full service wealth management service for my clients and I’d love to talk to you if; I love my clients, if you’r e looking for something like that or if you’re my client it’s getting to the end of the year, beginning of next year, I know we’re going to be talking, kind of structured as we do our annual review, here very soon. We talk throughout the year but this is a time where we really get together so I know we’ll have lots of conversations going forward. Mike Brady, Generosity Wealth Management and I will talk to you next week. Thank you. Bye bye.

Where Do We Go From Here?

I’ve had a relatively low position in stocks for clients for quite some time, but I’ve decided to lower it even further. I’m quite concerned about the correlation between Europe and the US, emotion/news driven volatility, and the uncertainty about what the Fed will do.

The risk just doesn’t warrant having as high a percentage as I’ve had.

On the flip side, profitability, efficiency, and cash balances have all been rising in the firms that comprise the S&P 500.

Is the return worth the risk?

Click on video to hear more.

TRANSCRIPT:

Hi there, Mike Brady with Generosity Wealth Management, here in Boulder, Colorado and the question is “where do we go from here?” And we’re getting a lot of conflicting information.  In the last month or so we’ve had huge volatility. We’re basically in a trading range, we have been for the last three or four weeks, but it’s been a trading range that’s extremely volatile.  And we’re talking a half percent to one percent up over a few days and then “Boom!” a negative two, three, four percent.

We’ve seen the correlations between the European markets and the U.S. and Asia; very high. And as we look back, five, ten, twenty years, the correlations for the international market have become increasingly correlated. We’re a global market now. And so what happens in Europe is, irritatingly, affecting our situation here today.

We’re also seeing a lot of emotions. And we’re seeing a lot of news driven markets- which just absolutely irritate the heck out of me. We as a market, as investors, keep waiting for some bail out, some news from the government: and that just absolutely distorting things.

Philosophically, I’m going to go off on a kind of a slight tangent here. I understand that the government will always be a part of our free market system. It’s never been 100% free. However, the interaction we’re having now, it’s like this 900 pound gorilla in the room; that makes things kind of difficult.

Kind of on the flip side, as we’re looking at some of the positive things. We’ve got almost all of the S&P 500 have done their earnings for their second quarter. And year over year growth is about 12% over the previous year. And if we take out some of the financials, we’re talking almost 20% earnings, net earnings growth.

You’ve got net margins, back in 2008, that’s efficiency of almost 6%. Now we’re going all the way up to 9.27. So when you look at companies, at balance sheets, Apple’s got 76 billion dollars in cash. I mean a lot of these companies have cash on the side-lines, they have been very efficient. Unfortunately, the negative effect of that is they have trimmed their work forces. But as you’re looking at some of the larger companies, the S&P 500, they’ve become very efficient over the last three or four years. They’ve kind of trimmed, as they see it, the fat, and they’re sitting on huge sums of investable assets that they can redeploy at some point. They’re just not redeploying it right now. And so that’s very frustrating.

I am, long term, when I say long term, we’re talking three to five years, bullish on the market. I think that, you know, we’re set up for that. But on the flip side, I mean, I hear all the arguments about how Europe is imploding- which it is. How that’s going to drag our financial system down. What’s going to happen with the EU and the Euro is anybody’s guess. And so, there’s a lot of reasons right now where it could go either way. I mean I just want to sit here and admit that.

What I’m doing, in my portfolio, is I am decreasing some of the equity positions that I have. I’m absolutely going to continue to have some. But from the very conservative to the very aggressive models that I have for clients, I am decreasing the equity positions. Most recently, most likely in the next week or two, we’re going to hear what, if anything Bernanke and the Fed is going to do. We’ve been talking about a little bit about this twist where they buy a bunch of medium to long duration treasuries- to shore up…, well to keep interest rates low.

So, you know, there’s a lot of things in play but I’m just telling you that right now I’m going to decrease my equity position. The market could go up. Once again, I’m going to be happy three to five years from now. But right now, it’s kind of hard to analyze which way it’s going to go. And in that particular case, are you getting the return for the risk that you’re taking and right now I’m questioning that. So I’m going to reduce some of my equity positions and decrease the percentage, of course still stay in the game.

Anyway, Mike Brady, Generosity Wealth Management, here in Boulder, Colorado, my phone number is 303.747.6455.

I have a new blog on my web site, www.generositywealth.com. And I highly encourage you to go there and look at it. I’m going to have archives going back a number of years. And I think it hopefully will be, I think it will be very helpful and very interesting as you go back maybe two years of weekly or every other week, videos like this or other things that I’ve found interesting and (some) analysis. So you can go and get a flavor of what I’ve been talking about for the last couple of years.

I am taking new clients I would love it if you gave me a call or passed this video along to someone who might be interested in a comprehensive wealth management firm, Generosity Wealth Management, that’s me. You have a wonderful week, we’ll talk to you later, bye, bye.

 

 

 

 

 

Conviction, Humility, Knowledge

This video covers a range of thoughts

* Conviction — what do you believe in?

* Humility — the market doesn’t care what you think

* Knowledge — If you do action A, is B the outcome?

I hope you click on my video and watch–I try to make it the best 3 to 5 minutes of your week. Okay, maybe that’s stretching it, but worthwhile nonetheless.

 

TRANSCRIPT:

Hi there, Mike Brady with Generosity Wealth Management, and this week I’m going to talk about two or three different things, one is conviction, the second is humility and another is just knowing what… oh, the answers to everything, which I guess kind of gets down to humility as well.

 

I last did a video about a week and a half ago and at that time I said “Gosh, I hope you’re not hearing from me every day”, that means things have calmed down just a little bit. And what has happened in the last week and a half is we’ve had, mainly, some one percent days plus or minus. Which in an environment where it is three to five percent in a day, that actually seems quite calm. But we’d have one percent, one percent, one percent, and then a big three percent drop. What’s very interesting is that although that three percent drop might just give away what you’ve gained over the last three days it seems so dramatic, so huge, when in fact if had been less one percent, less one percent, a slow dribble, it’s not quite as shocking to the system.

 

And this kind of gets down to a little bit of humility and kind of knowing everything. The market is a very complicated organism, OK? And the only people who understand exactly what is going to happen, there are some people like that, they’re called analysts and journalists, OK? And it is my belief that, many different factors go into what happens on a given day, a given week, a given month, into the particular market.

 

Let me just step back for a minute and talk about my philosophy in general; about the chaos theory. Things are very complicated- and sometimes things just happen. If A happens B does not necessarily happen. And sometimes B happens and there are a number of things that lined up for B to happen. The market is no different.

 

In an economy, or a country, let’s just say, in order for it to go from a developing country to a developed country, there are a lot of things that have to happen; you have to have an educated work force, you’ve got to have good governance, and confidence in the judicial system, you’ve got to have an economic system that is free and fair… There’s a number of different things that have to happen in order for a country to really move forward. And if one or two of them are happening, but not all the others, then you’re really not hitting all the cylinders. And so, it kind of gets to my belief in investing that you’ve got to have a conviction.

 

What do you believe in? Do you believe that the United States is what your bet is long term; whether it’s one year, five years, ten, thirty years. If not, you know, then I might question whether all of my discussions about the stock market are really for you. And if that’s the case we can talk about it, and give me a call; because there might be other non-equity, non-U.S. things that you should gravitate towards. What do you believe in? If you believe in nothing you’re going to be pulled one way or the other and all of these journalists who give you exact answers, which is what we wish that we would have about why a certain event happens. You’re going to be persuaded by one over the other, left and right, etc.

 

That boils down to my last topic- which is really humility. We have to understand that sometimes things just happen and what we believe is going to happen doesn’t always turn out the way we want it.

 

You know, I still have a conviction that this a market that I want to participate in but I’m still diversified. I still have some hedging positions. And the last three or four weeks, I have to absolutely admit it is much more drastic that what I had, you know, forecast four weeks ago. But that being said, the conviction is the same but I also have to remember that the market doesn’t really care what Mike Brady thinks; doesn’t care what Generosity Wealth Management thinks; doesn’t really care what you think. So therefore, we have to continue to change our beliefs. And so I have made some changes in the last three or four weeks. I’ve shared them with you over the video as things have progressed. But we also have to have conviction, but we also have to have some humility and also understand that sometimes things, and particularly on some of these days just knee-jerk happens. And so we have to kind of help smooth those things out, try to keep them out of our mind and not let them completely throw us off base.

 

I’m recording this on a Friday morning, Bernanke just spoke a little while ago and the market knee-jerked down then knee-jerked back up. And so, you know, those things are going to happen, it’s just part of it and we have to stay true to what we believe.

 

Going forward, I mentioned this at a previous video, that I’m going to have dynamic asset allocation as one of my offerings for my clients and my management system because I do believe that there’s a way that we can keep to our conviction, stay invested most of the time and strategically choose one sector over another. And it’s something that I’m very excited about. It’s something I’ve been working on for a very long time and I’m just about to kind of, offer it to all of my clients.

 

Anyway, Mike Brady, Generosity Wealth Management, 303.747.6455.

 

Eeeh, I’m supposed to smile! My mom tells me that I don’t smile enough in these videos but you know, I take this stuff very seriously, and so maybe that seriousness comes out in my lack of smiling here. But anyway, I hope you have a wonderful weekend and we’ll talk to you later bye bye.

 

 

Another Troubling Rise in Money Demand?

For years pundits chastised Americans for not saving enough, but in the past few years savings rates have exploded from negative to positive 5%. An unintended consequence of that plus banks and companies building up their own cash on the balance sheets leads to the “velocity” of money to plummet.

Money needs to change hands in a vibrant society in the fair exchange of goods and services.

Unfortunately, a liquidity trap can occur and may be occurring now that does not bode well for the economy going forward.

Read more about this at the link before. I’ll keep you updated on this too in subsequent newsletters.

 

Another Troubling Rise in Money Demand – Link

Should you Freak Out? – Part 2

Part 1 was 1.5 weeks ago. This is part 2, updated as of Monday morning.

It’s a particularly long video, but filled with my current thoughts

* What does the S&P downgrade mean?

* What should you have and not have in your portfolio?

* Should you move everything to cash?

* Is this emotional selling or fundamental?

I’m going to have 2 or 3 videos this week since so much is going on. One of the aspects of my job, in my opinion, is to over communicate with you as the adviser/client relationship is a partnership.

TRANSCRIPT:

 Hi there, Mike Brady with Generosity Wealth Management, and today the topic is “Should You Freak Out, Part 2.” Because I did part one about a week and a half ago and just because so much is happening in the markets I’m going to try to do a video maybe twice this week, maybe even three times, believe it or not. Just because so much is happening in such a short time, I want to make sure that I have good communication with you; both to my prospective clients, to my existing clients and to whoever else might be interested in this.

 So, a week and a half ago, if you go back and look at that video, what I said is, I said that I thought that the debt ceiling was going to be raised, but I it’s going to be kicked down the, the can’s going to be kicked down the alley. And, absolutely that’s what happened. It’s pretty much a joke in my opinion. I said that it was going to be rough, “it’s going to be very volatile,” I think is what I said. We certainly have seen some volatility in the last nine days or so. And then I asked the question, I go, “is this the abyss?” “Is this 2008, all over again?” And I said, “no, I didn’t believe that it was, but we were going to have a rough patch before it got back out.” And I was more optimistic than I was pessimistic. And, when data changes you should feel free to change your opinion. Some of the data is worse, I mean I didn’t see as rough of a patch last week as I said a week and half ago. But, the reason you have a diversified portfolio, the reason why you make modifications throughout the year, is for something like last week.

 If you are here at the beginning of the week wondering “Oh, my gosh! What should I do?” The answer is that it might be too late. You should have the portfolio already and a good relationship with your advisor who can explain what your portfolio is.

 Hopefully you’re very low, if down to zero, on municipals. Hopefully your exposure to Europe is next to zero. Hopefully you have some gold exposure. And hopefully you’re well weighted with a lot of bonds in there, as well, which are of a short term nature. So, anyway, that’s what you do in preparation for it. But here we are.

 So the question is, is this the beginning…, is this the end of the beginning or the beginning of the end? Or where does this really go. And one thing we have to watch out for, I think this is a very common thing to do, but we want to be the smart money. We want to be the professionals- and not fall into what so many others, maybe our neighbors are doing. And that is assuming that when the market goes down, that it will continue to go down, it very well could, but we can’t jump to that conclusion. When the market is down ten per cent that doesn’t mean it’s going to go down twenty per cent or forty. It is not linear. As an example, if you make one per cent one month, it doesn’t mean you’re going to make twelve per cent for the year. Or if you lose one per cent in a month, it doesn’t mean you’re going to lose twelve percent. It’s not linear.

 And so, right now the question we might ask ourselves is, is it down now and is it going to rebound back up either slowly or quickly, or is it going to continue and getting out and cutting our losses is actually the wiser thing to do.

 Right now it’s a very unknown situation. It’s always unknown- ‘kay I don’t want to sit here and say that we absolutely know- but we’re dealing with a couple of major macro events that have not happened before. One of which is the down grade of the, of the S & P, excuse me, from the Standard and Poor’s of the U.S. government. And the whole ripple effect that that might have; I mean, as it relates to municipals, as it relates to money markets, as it relates to a number of different things. It’s a little bit unknown. I will, I will just kind of talk about that right this second, I think.

 Let’s talk about the Standard and Poor’s downgrade. It was poor timing. Friday, after market close- I mean just pretty rude as far as I’m concerned. Particularly after the last couple of weeks of the debt ceiling, very hyper-political discussion, one way or the other, on the two sides there. And so, first off, let me just tell you, I have a pretty low opinion of Standard and Poor’s. These are the same people who had highly rated Enron and Worldcom bonds, companies and bonds right before they went belly-up. These are the same people who downgraded Lehman Brothers the day that it collapsed. These are the same people who gave AAA ratings to all of the sub-prime mortgages that were packaged in structured products, with CDOs, all the different, all the different alphabet; the CDO’s, CLO’s, et cetera. This is the same company that did that. And so, if they bring down AAA, the U.S. government from AAA to AA+, I think it is, or AA-, sorry I can’t quite remember, I’ll look here at my notes here in a second, but it’s the next one down. Then does that mean that the, what does it really mean? It doesn’t mean that they’re not wrong, it just means that I have a pretty low opinion of the Standard and Poor’s.

 Now, the U.S. government, I think they said, Standard and Poor’s pretty much said what we all believed anyway- that we have a huge debt problem. Now, frankly, let me just cut to the chase here- what does this really mean; the possibility of the U.S. government not paying its debt is zero. Because all of this debt is in U.S. currency, ‘kay, so that does not mean that there wouldn’t be a negative consequence if we just turned on the printing presses. But, I’m telling you, the probability of the U.S. defaulting on its debt is zero. Forget everything you’ve seen or read leading up to this the debt ceiling, which is a whole other discussion about how important this debt ceiling really is, but the probability is zero. Now if they turned on the printing presses now that would have other effects. Of course, there would be inflation, and other negative consequences but we would pay it off, even if it was in deflated dollars, okay?

 Now Warren Buffet, who I think very highly of, I mean the guy, give or take, thirty or forty billion dollars, he and I are, pretty much pals. And the guy is super smart, and he basically said the U.S. government, I’m still, the AA is now the previous AAA. Now what effect did this have in other governments? Japan was downgraded in January of 2011, it was pretty much a nonevent. The market dictates what they are going to require on the bonds that they buy from the government. So, Japan, it’s been downgraded most recently, and it pays half of what the U.S. does in order to borrow, ‘kay? That’s just it. We need to take into consideration that the Standard and Poor’s has probably said something that we all believe. They said the right thing, they said it kind of poorly, in my opinion, at a wrong time, they could have waited until a little of the uncertainty goes away but they said it, they said it.

 So now, this, the S & P downgrade does have an impact on municipals. Unfortunately municipals, I think a lot of them are going to be downgraded sometime this week or in the near future. That’s just kind of the way it goes. What impact that’s going have on the cost of borrow? It will probably increase the cost of borrow. They’re probably not going to survive quite as well as the treasuries. But once again, the market’s going to dictate what they require with your capital. The capital flows to what the best opportunity is. So, if a municipal bond or the U.S. government is still the best opportunity for them, that capital that’s in that free market, is going to say, “this is what premium I require for you to receive my capital.”

 I think, I’m just going to look here at my notes, because there is a lot going on, let me just jump to the conclusion. Which is; no I’m not freaked out and I don’t think you should be freaked out too.

 Now is the time where rational thought, calmness, an understanding that you’ve done what you can to put your portfolio in a position to weather this out, I am still, and I’ve not been convinced, although I could be convinced in the next couple of days, as data changes and opinion changes; but the fundamentals and the emotional are two different things. And I still like the fact that there’s two trillion dollars in balance sheet cash in the companies. And one and a half trillion in excess capital reserves in our banking system. I do like some of the efficiencies that companies have. And I still am feeling comfortable with some of the fundamentals in the market even if the technicals are not looking so good. And even if some of the emotionality has to be whetted out- now is not necessarily the time to freak out.

Now, that might change in a day or two. I’m actually recording this on a Monday morning, markets have closed sharply down. I think a lot of that is emotionality and a knee jerk reaction to an event that happened after the close on Friday.

 So, I’m going to, like I said, keep you updated and hopefully do these videos as often as I can this next week.

 Let me just kind of knock through a couple of things here…

 Municipals I talked about, let me put that to the side. You know there was nothing that was said last week that was new news- in my opinion. Europe: still a mess. If you’ve been watching my videos and reading my newsletters for the last year and a half, absolute disaster. You should have very very minimal international exposure.

 Let’s see, QE2, the end of quantitative easing two; we all knew it was going to happen. It happened at the end of June- that’s not a surprise.

 ‘Kay, I’m just going to reach through all my notes here, make sure I hit everything.

Buffet, God I love that guy, he’s smart, I wish I was as smart as him. Basically, he has a lot of cash and he is bullish on the U.S. and the U.S. market. It’s the most vibrant, robust and diversified economy. And you might say, “Oh, it doesn’t feel that way.” (Oops, I’m going to get a little bit closer and get focused again.) “Oh, it doesn’t feel that way.” But in comparison to all of the other options, that is the case.

 Let’s see, okay, I think I’m going to end now, I’ve been droning on for a while. One thing that I do want to kind of end on, there’s two things I want to end on; The first thing is, there seems to be a need to explain every type of a decline. Whereas we feel it’s our birthright if the market goes up. When the market went up 100 points or 200, it’s like “Okay, it went up 200.” We don’t sit here and say, “Why? Why did it go up? I don’t understand!”

 But on the other hand if it goes down 100 or 200; you got to explain it! There has to be an absolute answer for it. And I’m a chaos theory guy in general. And what that means, is sometimes things happen, a confluence of events that are very hard to explain. And I think that’s one of the things we’re in right now. A lot of newspapers and pundits are trying to explain exactly why this happened or that happened, etc. And it is typically a combination of all of them plus some emotionality thrown in to it.

 Right now, getting back to the- now is the time where we feel comfortable in the mix that we have with our portfolio. Maybe we’ll make some modifications as things go through. And as data goes through, you can’t be beholden to, “I’ve got to, this is exactly what is going to happen, and what I feel what must happen.” Because the market doesn’t care what we think. So we’ve got to also be willing to change our opinion. I’m just not changing my opinion just yet.

 The very last thing I want to talk about is- I’m going to throw up, after this video, some great web sites that I go and read throughout the day. I think they’re absolutely wonderful.

Forget CNN money, forget all these other kind of larger stream ones, they’re garbage. I like some of the blogs which analyze why something happens, or starts to explain it and goes underneath the surface; Pragmatic Capitalist, Zero Hedge, the Reform Broker, there’s a bunch of really good blogs out there that I really recommend.

 Anyway, Mike Brady. Generosity Wealth Management, 303.747.6455. And you have a wonderful day and give me a call if there are any concerns that you might have, thanks, bye bye.